Unfair but balanced commentary on tax and budget policy, contemporary U.S. politics and culture, and whatever else happens to come up

Tuesday, January 31, 2017

Mark Gergen's "How to Tax Global Capital," part 2

Here
is part 2 of my discussion of Mark Gergen’s paper, “How to Tax Global Capital,”
which was presented yesterday at the NYU Tax Policy Colloquium. Part 1 is here.

2. INTERNATIONAL SETTING

While
the new paper, discussing how the securities tax and the complementary tax
would apply to cross-border activity, is still at an early stage, the basics at
this point are as follows.

First,
the securities tax would only be remitted by U.S. issuers. These might be
defined as issuers who are listed on U.S. securities exchanges, possibly with
an election whether or not to be classified as a U.S. issuer if one is also
listed on foreign exchanges. Allowing electability would reflect the
assumption, which I discussed in the prior post, that the securities and
complementary taxes work in close tandem. (They might be especially
well-matched, however, as to publicly traded “foreign” securities, as these
might have readily discoverable market values that could be used for purposes
of the complementary tax, even if the issuer wasn’t required to remit under the
securities tax.)

Comment: My
point in Part 1 of my comments regarding principle-agent issues and the “forced
dividend” issue would affect how indifferent companies and their shareholders actually
were (administrative and compliance costs aside) to U.S. issuer status, even
assuming that the two taxes otherwise operate in close tandem.

Second,
the paper suggests that foreigners should get a rebate for inbound foreign
portfolio investment (FPI) that faced the securities tax. For example, if a
French individual owns $1 million of Apple stock, then she should get a rebate
from the U.S. Treasury for part or all of the $8,000 of securities tax that
Apple remitted with respect to such stock. How best to do this remains open at
this point.

Comment: This
would be a policy change, insofar as foreign shareholders effectively bear
their share of entity-level corporate income taxes. While it might be a
desirable change, if we believe that under present law they don’t bear the true
economic incidence of this tax anyway (and absent the treaty leverage we might
get from initially charging the tax but being willing to reciprocally negotiate
it away), it seems likely to present implementation difficulties.

Third,
the paper suggests that inbound foreign direct investment (FDI), as in the case
where a foreign corporation, owned by foreign individuals, conducts business
activities in the U.S., should be exempt from both taxes. (Insofar as it’s
owned by U.S. individuals, they’d pay the complementary tax.)

Comment: This
may be undesirable insofar as the foreign companies are earning extra-normal
returns in the U.S., on which we can make them bear some of the incidence. It
also would lead to “round-tripping” problems, from the use by U.S. persons of foreign
entities to avoid the wealth tax, if the complementary tax wasn’t fully up to
the job of taking the place of the securities tax.

Fourth,
the paper suggests that no foreign tax credits be allowed when U.S. persons owe
complementary tax on foreign business operations that are also subject to
source-based income taxation. The rationale is that U.S. companies are good at
tax planning to avoid source-based taxes.

Comment:
While I am generally no fan of foreign tax credits, there are further issues
raised here for those who do like them, as source-based taxation is not always
wholly avoidable. Also, there might be value to being able to negotiate down
each other’s source-based taxes (e.g., via permanent establishment requirements
for levying a source-based tax) in the treaty context.

Fifth,
the complementary tax might not apply, for administrative and informational
reasons, to foreign realty (e.g., London real estate, or natural resources
holdings in a Gulf State).

Comment: I
would certainly want to apply the complementary tax, if sufficiently administratively
feasible, in these settings.

Sixth,
with regard to the fundamental challenge of levying the tax on foreign assets –
which often is thought to make wealth taxation highly problematic – the paper
is bullish on the capacity of FATCA-like outreach to make enforcement feasible.
It notes that this could in principle be handled via either withholding or
information reporting (centered in either case on third-party agents), which
might have to apply to tax havens in order for the complementary tax to work
well enough.

Comment: Clearly
this has the potential to be a huge implementation problem, which I trust the
paper, as it develops, will address more fully.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.